A corporation that
accused its broker of mismanaging its funds through speculative investments is
entitled to a new arbitration hearing because the chairman of the arbitration
panel misrepresented himself as an attorney, the Ninth U.S. Circuit Court of
Appeals ruled on Friday.

The
panel, ruling on what it said was an unsettled question in the circuit, held
that the three-month statute of limitations for challenging an award under the
Federal Arbitration Act is subject to equitable tolling. Addressing the merits,
it held that the plaintiff was deprived of a fundamentally fair hearing, and
that the award had to be vacated as a result.

The
plaintiff, Move, Inc., had an investment account with Citigroup Global Markets,
Inc. Its client agreement mandated arbitration of any and all disputes before a
securities industry panel.

In
September 2008, Move initiated arbitration before the Financial Industry
Regulatory Authority, alleging that Citigroup mismanaged $131 million of Move’s
funds by putting it in auction rate securities. FINRA provided the parties with
a list, and resumes, of 30 potential members of the three-member arbitration
panel.

First Choice

Move
ranked James H. Frank as its first choice. According to his resume, Frank was a
Southwestern Law School graduate and admitted to practice in California, New
York, and Florida.

Frank
served as chair of the panel, which also included attorney Arthur Berggren and
Daniel Brush, a certified public accountant and certified financial planner.
The panel ruled in favor of Citigroup.

Over
four years later, The AmLaw Litigation Daily reported that Frank had lied about
being a licensed attorney. In fact, the arbitrator, whose full name is James
Hamilton Hardy Frank, had assumed the identity of retired attorney James
Hamilton Frank of Santa Monica.

FINRA
ultimately confirmed that Frank had lied on his resume and removed him from its
roster of arbitrators.

Less
than three months after the AmLaw report appeared, Move moved to vacate the
arbitration award under the Federal Arbitration Act, asserting equitable
tolling of the statute of limitations. Citigroup argued that the FAA does not
permit equitable tolling, that it would be unjustified under the facts of the
case even if it were permitted, and that even if the statute were tolled, the unanimous
decision of the arbitrators should stand on its merits.

District Court
Ruling

U.S.
District Judge John F. Walter ruled for Citigroup.

He
reasoned that while the issue of equitable tolling under the FAA was unsettled,
the plaintiff had the better of the argument. But he agreed with Citigroup on
the merits, concluding that Frank’s misrepresentations did not deprive Move of
a fundamentally fair hearing as required by §10(a)(3) of the act, and that the
panel’s decision was entitled to deference.

Senior
Judge Dorothy W. Nelson, however, in her opinion for the appeals court, said
Move was entitled to equitable tolling and to a judgment vacating the
arbitration award.

She
said the law of the circuit should be settled in favor of equitable tolling.

The
usual rule in federal cases, she explained, is that a statute of limitations is
subject to equitable tolling unless the text of the statute is to the contrary.
“We agree with the district court and conclude that neither the text, nor the
structure, nor the purpose of the FAA is inconsistent with equitable tolling,”
Nelson wrote.

Prejudice Found

Turning
to the merits, the judge said Move established prejudice resulting from
arbitral misbehavior under §10(a)(3).

Move,
she said, made it clear that it wanted Frank as an arbitrator because it
understood him to be an attorney who could interpret the “sophisticated legal
concepts” at the heart of its case. The company, she noted, exercised its right
to strike potential arbitrators who lacked the experience Frank represented
himself as having.

Rejecting
Citigroup’s argument that there was no prejudice because the other two
arbitrators were untainted, Nelson said there was no way to know whether they
were influenced by Frank. Besides, she wrote, Frank’s involvement was itself
prejudicial because Move had the right to have its case heard by three
qualified arbitrators, not merely two.

Judge
Richard A. Paez and Senior District Judge Elaine E. Bucklo, visiting from the
Northern District of Illinois, joined in the opinion.